Sunstone flat, NorthStar quiet, Trex slips on debuts; Aspect borrow off top; Iconix, Blackboard plan deals

By Kenneth Lim

Boston, June 13 - Newly issued convertibles struggled to catch the attention of investors on Wednesday as unexciting pricing and a widespread sense of cautiousness gave the newcomers dull debuts.

Sunstone Hotel Investors Inc. was unchanged from its reoffered price with the deal seen as unattractive even after it came cheaper than talk.

NorthStar Realty Finance Corp. was quiet, although some positive interest was seen after the deal priced at the cheaps.

Trex Co. Inc. priced its deal cheaper than talk, but the new convertible still slipped below par as hedge funds stayed away from the deal because of a lack of stock to borrow.

Despite the tough pricing environment for issuers, convertible issuance continued to march forward on Wednesday with new deals announced by Iconix Brand Group Inc., Blackboard Inc. and Aspect Medical Systems Inc. The three companies have $510 million of convertibles slated to price Thursday after the market closes.

The market in general had a slightly better session as the stock and bond markets improved over the day.

"I think the market feels a lot better since yesterday," a convertible strategist said. "With the bond market trading at its lows yesterday and then coming in this morning it was still low, but the fact that it's rallied at least for the day, I think people feel a little more confident on near term prospects."

Recent woes hit new deals

Demand for some of the new issues may be hit this week because of the recent declines in the secondary market, a buyside convertible trader said.

"I don't think it's a coincidence that the new deals are doing so badly at the same time the secondary market's taking a hit," the trader said.

"When the existing converts out there are getting cheaper, it's hard for the underwriters to be too aggressive. Some of them may have thought they could get away with one set of terms when they started marketing, but when the market's doing so poorly some of them have had to lower their expectations. I'm not going to take your deal if I can do better on something that's already out there."

Some of the new issues being offered now are also smaller and more risky deals, and investors will demand better terms before getting involved, the trader said.

"A market like this usually isn't the best time to come out with a convert because you really have to come cheap to compete," the trader said. "Yields are up and could stay up or rise. The stock market's doing poorly so you'll have to price the premium off a low...Those who can wait will probably wait a while for things to settle down, but those that are coming out now are probably those who can't wait. These are the guys who probably need cash urgently, and most of the time these are the smaller cap companies with poorer credits. It's not always the case, but I think you'll see it enough."

Sunstone flat on poor demand

Sunstone's new 4.6% exchangeable senior notes due 2027 were flat on Wednesday with the deal seen as fair even after it was reoffered below talk.

The exchangeable was 98.5 bid, 98.75 offered against a stock price of $28.15. The exchangeable was reoffered at 98.75. Sunstone stock (NYSE: SHO) closed at $28.73, up by 2.86% or 80 cents.

Sunstone priced its $220 million offering on Tuesday after the market closed with an initial exchange premium of 23.5%. The deal was talked at a coupon of 4.3% to 4.6%, an initial exchange premium of 23% to 25% and a reoffer price of at 99.5.

"I'm not surprised," a sellside convertible analyst said of the pricing. "It didn't look attractive at all before pricing, so they probably had to price it so cheaply to move it."

The notes are issued by Sunstone's operating partnership, Sunstone Hotel Partnership LLC and are exchangeable into Sunstone's common stock.

There is an over-allotment option for a further $30 million.

Bear Stearns was the bookrunner for the Rule 144A offering.

Sunstone, a San Clemente, Calif.-based real estate investment trust with a portfolio of hotel properties, said it will use the proceeds to pay down a $175 million loan on the Hyatt Regency Century Plaza Hotel and to buy back up to $60.2 million of its common stock. Sunstone on Monday said its board approved a $100 million stock buyback program.

NorthStar quiet on debut

NorthStar's new 7.25% exchangeable senior note due 2027 was quiet on the Street on its first day of trading, although the deal was seen bid slightly higher in pre-market movement.

The exchangeable was 100.125 bid against a stock price of $13.25 early Wednesday. NorthStar stock (NYSE: NRF) gained 0.45% or 6 cents to close at $13.31.

"Haven't heard anything [on NRF]," a sellsider said. "It might have bounced back as the stock was up."

NorthStar priced the $150 million deal with an initial exchange premium of 27.5% on Tuesday after the market closed. The exchangeables were offered at par. The deal was talked at a coupon of 6.75% to 7.25% and an initial exchange premium of 27.5% to 32.5%.

The exchangeables are issued by NorthStar's operating partnership, NorthStar Realty Finance LP, and are exchangeable into NorthStar common stock.

There is an over-allotment option for a further $22.5 million.

Banc of America and Wachovia Securities are the bookrunners of the Rule 144A offering.

NorthStar, a New York-based real estate finance company that focuses on real estate debt and securities and net lease properties, said the proceeds of the deal will be used to repay existing debt, acquire investments and fund general purposes.

Trex slips out of the gate

Trex's new 6% convertible senior subordinated note due 2012 was down ½ point outright early Wednesday as a lack of hedge participation kept volumes thin on the new paper.

The new convertible was seen at 99.5 against a stock price of $18.94 early in the day. The convertible was offered at par. Trex stock (NYSE: TWP) declined 1.27% or 24 cents to close at $18.70.

"They were 99.5 this morning, haven't seen them since," a convertible trader said.

Trex priced the $85 million deal with an initial conversion premium of 15%. The deal was talked at a coupon of 4.5% to 5.5% and an initial conversion premium of 20% to 25%.

The over-allotment option was upsized to an additional $12.5 million from the original option for a further $10 million.

JPMorgan was the bookrunner of the registered offering.

Trex, a Winchester, Va.-based maker of wood-alternative decking, railing and fencing products, said it will use $25.7 million of the proceeds to repay its outstanding $24 million of 8.32% senior secured notes due 2009. It will also use the proceeds to repay an existing $45.8 million of senior secured revolving loan and fund general purposes.

"I haven't heard anything on that," a sellsider said. "But there's no borrow on this so I'm not surprised."

Aspect borrow off top-rate

Aspect's planned $110 million of seven-year convertible senior notes was seen at first glance to suffer from an off-top-rate borrow rebate and potential fundamental risks, analysts said Wednesday.

The deal is expected to price Thursday after the market closes. Price talk guides for a coupon of 2.25% to 2.75% and an initial conversion premium of 25% to 30%.

The convertibles are offered at par.

There is an over-allotment option for a further $15 million.

Goldman Sachs is the bookrunner of the Rule 144A offering.

Aspect Medical, a Norwood, Mass.-based maker of the BIS anesthesia monitoring system, said it will use the proceeds to buy back about 2 million shares of its common stock from Boston Scientific, which will be left with about half of its current stake. The two companies earlier in the week ended their development alliance on the medical device.

One sellside convertible analyst said Aspect's story hinges on its ability to develop its anesthesia monitoring system for two depression and Alzheimer's monitoring. But Boston Scientific's withdrawal from the partnership raises questions about prospects down those two avenues.

"It's a tiny market cap company, a medical device company," the analyst said. "They have a device on the market that's slowly ramping and they're developing it for two other indications. We're not going to get final data on that until next quarter. Boston Scientific just sold them back the rights to it, and if we give them the benefit of the doubt, it's because Boston Scientific is pulling out of that device market, but you have to wonder."

Investors will probably feel more comfortable after the final development data is released, the analyst said.

"The company has no debt now, but it hardly has any cashflow to support any debt," the analyst said, noting that the underwriters could be using a credit spread in the mid- to low-300 basis points over Libor region. "I don't think I'm going to be tighter than that."

The analyst said the rebate on the stock borrow appeared to be about 4%.

"The borrow is not top rate, but it's not that bad," the analyst said.

Another convertible analyst, however, thought that the borrow was "going to be a little tough."

The second analyst also felt that the stock's volatility could be lower than expected.

"I think they're using something like 35% vol," the second analyst said. "Historical vol is closer to 40% to 50%, but the options are around 30%. The thing is a lot of the vol catalysts have passed the company, so I'm not too sure on the vol."

Iconix, Blackboard launch deals

Iconix and Blackboard also announced new deals on Wednesday with pricing expected on Thursday after the market closes.

Iconix's $250 million offering of five-year convertible senior subordinated notes is talked at a coupon of 1.5% to 2% and an initial conversion premium of 30% to 35%.

The convertibles are offered at par.

There is an over-allotment option for a further $37.5 million.

Merrill Lynch and Lehman Brothers are the bookrunners of the Rule 144A offering.

Iconix, a New York-based brand management company, said the proceeds of the deal will be used to fund convertible note hedge and warrant transactions and to invest in or acquire new brands.

Blackboard's $150 million of 20-year convertible senior notes is talked at a coupon of 3% to 3.25% and an initial conversion premium of 60% to 65%.

The convertibles are offered at par.

There is an over-allotment option for a further $15 million.

Credit Suisse is the bookrunner of the registered offering.

The notes will have extra embedded warrants at 0.6 to 0.65 times the base underlying shares.

Blackboard, a Washington-based provider of enterprise learning software applications, said $19.4 million of the proceeds will be used to repay an outstanding senior secured term loan with the remainder earmarked for general purposes.

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